OCZ exits memory module markets and answers our questions

Shifting focus

Earlier this week it was announced in a press release and during a conference call that OCZ Technology would be exiting the memory modules business as of the end of February 2011:

...the board has determined that it is in the best interests of the
stockholders to accelerate plans to discontinue its remaining DRAM
module products by the end of its current fiscal year...

Earlier in 2010 OCZ made it a point to focus only on the more profitable high-end enthusiast class memory modules but apparently that didn't work out either and the company is going in another direction completely. The reason behind this should be obvious to anyone that follows the PC market - prices have dropped considerably and the ability for differentiating modules has deteriorated. While not too long ago the newest water-cooled overclockable memory was a noteworthy component launch, it's been quite some time since enthusiasts were truly excited about memory. Sad, but true.

Don't cry for OCZ though, they have other things going for them though.

Source: OCZ Technology

These figures show the slide of memory as a portion of OCZ's revenue from Q3 2009 and projected through Q3 of 2011. Memory sees a drop from $22 million to $6.2 million - down 71%. Power supplies were down as well but SSDs are where OCZ is really making a killing - up from $2.1 million to $41 million by the end of 2011! That is more than a 19x increase in revenue and is obviously where OCZ and its board plan on focusing the company.

Still, seeing one of the companies that created the enthusiast memory market bow out is a move we didn't want to see happen and we had some questions and concerns. I sent over a list of questions to the marketing team and Alex Mei, Executive VP and CMO of OCZ Technology, hit us back with some answers.

PC Perspective: When did you first enter the memory market?

Alex Mei, OCZ: Memory modules along with heat-sinks were among the first products that OCZ produced beginning around 2002. Ryan Petersen, the founder and still CEO of the company, was very involved in the memory and heat-sink designs and wanted to deliver products that offered higher performance and more value to consumers looking to push the envelope in terms of speed and overall performance on existing platforms. Back in those days “overclocking” was not readily accepted like it is today but OCZ believed the Enthusiast market was big enough to address. OCZ was founded by enthusiasts for enthusiasts and we became determined to manufacture the very best high-speed memory for overclockers which resulted in many firsts including being the first manufacturer to make dual channel optimized kits available to the public and mass producing ultra high performance water cooled memory from our FLEX series.

PCPer: What about the memory market made it unprofitable?

OCZ: Overall there has been a lot of weakness in the global DRAM market and there are many contributing factors including supply issues from fabs, many of which have successfully made the shift to NAND flash memory. When it comes to branded modules part of the problem comes from sheer commoditization and price erosion, there are countless “me-too” products on the market. When we first started producing memory there was room to add value in terms of performance with tighter timings, more bandwidth or even just with higher density. As platforms improved the need for overlocking has decreased and other bottlenecks arose including the need for next generation storage. With a product like SSDs consumers can really “feel” a difference when it comes to improved real world performance, this is one of the reasons for our shift in focus as we can once again innovate and add more value.

PCPer: What are your plans for honoring warranties on existing modules?

OCZ: In the short term nothing has changed and OCZ is continuing to sell and support memory through the wind down process, in the long term the focus of the company is shifting to our fast growing SSD solutions but rest assured we are continuing to fully support customers that have purchased our DRAM products. What this means for consumers is that we will continue to provide service and support for these solutions as well as take care of the lifetime warranties. As always, OCZ will honor warranties with either replacements, credit towards another product, or refunds at fair market value. We very much appreciate our customers and if they have any questions or require support they should not hesitate to contact our forum or in-house support team.

PCPer: Do you think leaving memory will hurt the OCZ branding in the future?

OCZ: I think it is important to recognize that memory is one of the products that made OCZ what it is today; it was that experience in DRAM and flash drives that gave us an edge in solid state drive design and manufacturing early on. I also think that moving forward we have a lot of other opportunities to not only brand, but add value with other product lines. There was a time when heatsinks represented a significant amount of our revenue but we moved away from them to focus on other categories and as a result effectively grew the brand. At the end of the day, OCZ now serves both the enthusiast and enterprise markets and our focus is on the design and manufacture of innovative solutions that address the real needs of customers; as long we do this and continue to provide the highest quality service and support we hope to continue and grow.

PCPer: What products are overtaking the OCZ lineup going forward?

OCZ: As you can see from our last earnings release, other categories, especially solid state drives, have already overtaken the DRAM products and represent the majority of our sales, and just by itself exceeded historical quarterly revenue totals across all categories. Part of this is also because of our fast growing enterprise storage business but we experienced a lot of growth in both consumer and enterprise segments for SSDs. Over the last two years we have refocused the business and even sold off certain BUs including our peripherals business in order to focus on solid state drives and power management. These two areas are both strategic product categories for us and you can expect to see a complete range of new power supplies both under the OCZ and PC Power brand designed for enthusiasts and industrial applications as well as solid state drives in a complete array of interfaces including SATA, PCIe, SAS, Fibre Channel and even our own HSDL (High Speed Data Link).

PCPer: Do you think those can sustain the company into the future?

OCZ: The short answer, Yes. The long answer, what really is important is delivering solutions that customers want. Whether that is an enthusiast looking to crush benchmark scores or an IT Manager looking to improve the company’s TCO, at the end of the day it is about providing high-performing, reliable and cost-effective solutions that address the needs of customers. While building a quality product and backing it up with service and support are givens, what has also sustained OCZ through all the years is the support from our customers. We highly value what the customers have to say as well as what the industry-leading press like PC Perspective have to say about our products. There are countless times when a media reviewer or customer have influenced our decisions on what features and performance attributes to focus on, and we believe by listening to valued customers like the readers of this site we can build a better product regardless of what category it falls in, and that is what will sustain the company moving forward.

There isn't much else to say here other than we are glad to hear that OCZ plans on taking care of those consumers that have purchased OCZ memory products over the years. The question that remains for us is whether other companies like Corsair, Kingston, Patriot, G.Skill, etc. are going to take the same move or simply take the added marketshare for themselves. Obviously there is turmoil in the DRAM segments and I don't think we have seen the end of the movements for 2011.

See below for the full OCZ press release that set off this discussion:

Net revenues in Q3'11 were a record $53.2 million, and increased 40% both on a year-over-year and sequential basis, from $38.0 million reported in Q3'10 and in Q2'11.

SSD revenues reached a record $41.5 million in Q3'11, an increase of 325% over Q3'10 SSD revenues of $9.8 million, and a 105% increase sequentially over Q2'11 SSD Revenues of $20.2 million.

In August 2010, the Company announced a strategic optimization of its memory products whereby it discontinued certain unprofitable commodity memory module products with the intent to continue only with certain high-performance memory products. However, since that time, there has been well-chronicled, continued weakness in the global DRAM markets.

Having balanced this DRAM market weakness against the capital needs of the Company's growing SSD products, the board has determined that it is in the best interests of the stockholders to accelerate plans to discontinue its remaining DRAM module products by the end of its current fiscal year of February 28, 2011. Accordingly, our DRAM products are now expected to have minimal, if any, sales in the next fiscal year and beyond.

Reporting on a GAAP basis, which includes certain items related to the accelerated discontinuation of the Company's DRAM products, the acquisition of certain intellectual property, changes in warrant derivative valuation, and other non cash charges, GAAP net loss for Q3'11 was $8.3 million, or $0.29 loss per diluted share. This compares to GAAP net loss of $1.0 million, or $0.05 loss per share in Q3'10.

Non-GAAP net loss for Q3'11 was $0.9 million, or $0.03 loss per diluted share, as compared to non-GAAP net loss for Q3'10 of $1.6 million, or $0.07 loss per share. A reconciliation between GAAP and non-GAAP information is contained in the tables below.

Began mass production of 2xNm based SSD for low cost applications and started sampling 2xNm based high durability SSDs for Enterprise Server and Storage applications

Opened new SSD manufacturing facility in Taiwan, nearly quadrupling our manufacturing capacity with the addition of two new SMT lines, the first in October and the second which has just come on-line

Business Overview:

"Revenue generated from our Solid State Drive products for the third fiscal quarter more than doubled on a sequential basis," said Ryan Petersen, Chief Executive Officer of OCZ Technology. "SSD revenue accounted for 78% of our revenue and just by itself exceeds our historical quarterly revenue totals across all categories, thus reinforcing our decision to discontinue our remaining DRAM products."

Mr. Petersen concluded, "We have focused on building the OEM and enterprise segments of our business, and last month we announced a mass production order from a Tier 1 OEM for our enterprise class SSDs, reflecting the reliability, speed and total cost of ownership solid state drives provide over traditional mechanical hard drives. We believe the market opportunity for SSDs is significant, and to that end, we will continue to invest in research and development to extend our leadership position. We also plan to increase our sales and marketing efforts in order to facilitate continued revenue growth and increased market share as SSDs gain adoption in all segments."

Revenue Information:

To help investors better understand OCZ's historical revenue trends and its rapid product transition from high performance memory into SSDs, a revenue chart is shown below for the last 9 quarters: